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The Economics of Exchange Rates (Collected Works of Harry Johnson) by Harry G. Johnson, Jacob A. Frenkel

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CHAPTER 11

DEVALUATION IN AN EMPIRICAL GENERAL EQUILIBRIUM MODEL

KENNETH W. CLEMENTS

University of Chicago

I. INTRODUCTION

This paper analyzes the effects of devaluation on trade flows and domestic prices. We do this by simulating a unilateral devaluation of the home country’s currency within a multisector econometric model of the open economy. As a result, we are able to make statements about the actual numerical size of the effects of devaluation, rather than, say, just the sign.

At the outset, it must be emphasized that the model is very new, it has not yet been extensively analyzed, and that its properties have not been compared with those of other existing econometric models. Hence, the simulation results have to be treated with extreme ...

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